Exponential discounting, cont. Suppose instead that = 0.1. (a) Compute the utility of each of the four utility streams from the point of view

Exponential discounting, cont. Suppose instead that δ = 0.1.

(a) Compute the utility of each of the four utility streams from the point of view of t = 0.

(b) What would you choose if given the choice between all four?

(c) What if you had to choose between

a, b, and c? As these calculations show, your discount factor can have a dramatic impact on your choices. If your discount factor is high (that is, close to one) what happens in future periods matters a great deal. That is to say that you exhibit patience: you do not discount your future very much. If your discount factor is low (that is, close to zero) what happens in the future matters little. That is to say that you exhibit impatience: you discount your future heavily. It should be clear how the value of δ captures your time preference.